Tesla is entering the solar business at a risky time

Solar has generally been a difficult business, and that isn't
looking to change under President-elect Donald Trump.

Tesla officially acquired SolarCity in a deal worth
roughly $2 billion on Monday. Prior to the shareholder vote, Musk
unveiled several solar products that will become the focus of
Tesla's energy line. They include roof shingles that look like a normal roof,
but are embedded with solar cells to generate energy, as well as
an at-home battery, Powerwall 2.

Tesla will also continue to install larger solar array projects
using its commercial battery, Powerpack 2, as was the case with the island of Ta'u that is now running almost
entirely on solar power.

As is always the case with Tesla CEO Elon Musk, he did not enter
the solar business half-hearted.

He has an entirely new product, the solar roof, to make
converting over to solar energy more aesthetically pleasing, and therefore more
alluring, transition than traditional, clunky solar panel
installation.

He's also generating excitement for solar power through projects
like the Ta'u solar project, similarly to what he did for
electric cars. As Business Insider's Matt DeBord has written,
Musk is a master marketer, and it could pay
off for solar the same way it did for EVs at a time of general
unpopularity.

But the solar industry, in general, has been fledgling — and it
doesn't look like a Trump presidency will make things any
easier.

SolarCity's cash problem

Mark
Von Holden/AP

Tesla acquired SolarCity's roughly $3 billion in debt as part of
the merger. According to Bloomberg, debt is endemic among the solar
industry — the industry has borrowed $200 billion since 2010.
Industry-wide cash flow also declined massively in that period by
$3 billion.

As for SolarCity itself, the company posted losses in all but
three quarters since its IPO in 2012, and its shares have
declined by over 50% this year.

Now, debt is fairly common among project power developers.
Tesla commented on SolarCity's debt in a Nov. 1 blog post, stating that SolarCity's assets
significantly exceed its recourse and non-recourse debt. Musk has
also said he would personally pay off SolarCity's debt if need-be
in a Nov. 4 tweet.

Still, debt issues aside, whether SolarCity can generate the cash
flow it needs has yet to be seen.

SolarCity did change its strategy in 2016 to become more cash
positive. The company has conventionally leased panels, but is
now selling more panels to increase cash flow. SolarCity
introduced a loan program in June to incentivize
purchasing as part of that change in strategy.

Tesla will also look to cut costs elsewhere in 2017 now that the
merger has been approved through "synergies," or layoffs.

There's also been speculation that Musk will need to
eventually raise capital as Tesla looks to launch the Model 3 as
it takes on the solar business. Musk said in late October that
Tesla "probably" would not do a capital raise in the first
quarter of 2017, though.

So in general, Tesla will look to increase SolarCity's cash
flow as part of its goal to have it add $500 million
in cash to Tesla's balance sheet over the next three years. Tesla
will also likely be prepping for a capital raise at some point in
the 2017 fiscal year.

But a Trump presidency could make things more difficult.

Solar subsidies in question

Drew Angerer/Getty Images

President-elect Donald Trump is an ardent climate denier, known
for his controversial statement that global warming
is a hoax perpetrated by the Chinese

Trump has since acquiesced ever so slightly, saying there
is "some connectivity" between human activity and
climate change.

But that's not exactly a comforting re-positioning, especially
considering he chose Myron Ebell, a known climate
denier without any scientific degrees or qualifications, to
oversee the Environmental Protection Agency. Ebell does not think
the government should support subsidies to catalyze adoption of
solar or wind energy.

"We would like to get rid of all of this stuff," Ebell told Business Insider in August. "And we
think that the use of energy will become more efficient just
through the innovations that will occur in free markets when
people are allowed to invest their money in things that can make
money."

Putting the fate of solar subsidies into question could be a
challenge for Tesla as it looks to increase SolarCity's cash
flow. It also poses issues for when Tesla eventually looks to do
a capital raise.

Good luck to Tesla/SolarCity trying to raise money in capital markets with renewables subsidies in doubt.

Angelo Zino, an equity analyst at CFRA Research, wrote in a Nov.
9 research note that a Trump presidency is bad for the solar
industry as it could negatively impact solar subsidies.

"We believe a Trump presidency along with a Republican-led
Congress poses significant risks to a potential
reduction/elimination of the 30% ITC [Solar Investment Tax
Credit], extended at the end of '15," Zino wrote.

Meanwhile, Trump is also looking to eliminate all climate
change research by stripping NASA's earth science division
of its funding, the Guardian reported this week.

Trump also wants to roll back the Clean Power Plan that requires
the EPA to reduce greenhouse gas emissions by law.

None of this bodes well for Tesla projects that rely on
government funding. For example, Tesla's Ta'u solar project was
partially funded by the EPA.

"Assuming it pans out that we are able to do a solar roof [for]
less than a normal roof, before you even take into account the
value of the electricity. Assuming that pans out, well subsidies
don’t even matter," Musk said.

Tesla's solar
roofTesla

But there are some issues with that line of thinking.

For one, the impact Tesla's solar roof business will have on
SolarCity's 2017 cash flow largely depends on when it's being
sold. Musk said during that same question-and-answers session
that Tesla will "start doing the solar roofs in volume sometime
next year."

Solar cell production for the roof will occur at a factory in
Buffalo, New York toward the end of June, the Buffalo News reported.

If production isn't occurring until the end of June, the
profitability of Tesla's solar roof won't really start being seen
until the end of 2017. Considering it will roll out in California
first and become available in other states later, as the Buffalo
News also reported, it seems likely the impact it has on Tesla's
bottom line won't really be seen until fiscal year 2018.

That means Tesla's solar business will continue to rely mostly on
traditional solar panel installation in 2017, something that does
rely on solar subsidies. It's also difficult to take Musk's solar
roof pricing claim at face value without any real numbers behind
it at this point.

Additionally, even if the solar roof has the same value
proposition as a non-solar roof, customers aren't exactly
re-roofing their homes all too often. Musk has admitted this, adding that's why traditional
panel installation will still be off erred.

But the point is that Musk is putting a lot of fate in its solar
roof business taking off when the product isn't likely to exist
until mid-2017, pricing is still unavailable, and demand is still
largely unknown. All of this while the fate of solar
subsidies are bleak.

However, it is worth noting that Tesla has an advantage over
other solar companies through its battery installation projects.
For example, Tesla was selected to provide a 20 MW/80
MWh Powerpack system at the Southern California Edison Mira Loma
substation.

Tesla was selected for the project, which will be the largest
lithium ion storage project upon completion, following
a rupture in the Aliso Canyon natural gas reservoir in
California a year prior. The project highlights a growing need
for utility-scale storage solutions that don't rely on gas
or water pipes, which Tesla is ready to tap into.

Additionally, Tesla's solar roof does make the premise of solar
installation more exciting and futuristic than before, and could
still be a large draw for the company if the price is right down
the road.

All of this is to say that Trump doesn't seem bound to make
things easy for solar installers, and Tesla will have to
navigate those waters.